State Administration of Taxation Decree No.4

The Procedure for the Control of Tax Deduction of Bad Account Losses of Financial enterprises was adopted at the Second Administrative Conference of the State Administration of Taxation on August 19, 2002 and shall enter into effect as of November 1, 2002.

                                                                    Jin Renqing
                                   Commissioner of the State Administration of Taxation
                                                              September 9, 2002

The Procedure for the Control of Tax deduction of Bad Account Losses of Financial enterprises

Article 1 In order to strengthen the collection of income tax from financial enterprises, standardize the tax deduction of bad account losses and increase the risk resistance capacity thereof, this Procedure has been formulated in accordance with the "Provisional Regulations of the People's Republic of China for Enterprise Income Tax" and the Detailed Implementation Rules thereof.

Article 2 A financial enterprise may make tax deduction of bad account losses after it has taken all possible measures and followed all necessary procedures provided the rights of credit and equities involved therein comply with one of the following conditions:

1. The debtor and guarantor are declared bankrupt, closed down or disbanded in accordance with the law and have terminated their status as bodies corporate and the financial enterprise involved therein has failed in its efforts to recover the loan from either the debtor or the guarantor.

2. The debtor is dead or has been declared lost or dead in accordance with the "General Rules for the Civil Law of the People's Republic of China" and the financial enterprise involved therein has failed in its efforts to recover the loan from either the debtor or the guarantor by making its claim from the property or legacy thereof.

3. In the event the debtor has sustained great losses on account of a major natural adversity or accident and failed to make claim from insurance and thus unable to repay the debt; or after the insurance claim is made, the debtor is still unable to repay part of the loan, the financial enterprise has failed in its efforts to recover its loan from the retrieval of the debtor's property or from the guarantor.

4. When the debtor and guarantor which though have not been declared bankrupt, closed down or disbanded in accordance with the law have terminated business operation altogether and the business licenses thereof have been cancelled or revoked by the administration for industry and commerce in accordance with the law thus the status as bodies corporate terminated, and the financial enterprise involved therein has failed in its efforts to make claims from the debtor and guarantor.

5. In the event the debtor has violated law and has been punished in accordance with the law and its property is insufficient to repay the debt and there is no other person responsible for the repayment of the debt, and the financial enterprise has failed in its efforts to recover the loan.

6. When the debtor and guarantor have failed to make the repayment of the loan due, the financial enterprise has brought the case to the court, the courts has passed a verdict to make the debt and guarantor make repayment by compulsion, neither the debtor nor the guarantor has the necessary property for the implementation of the verdict, the court has finally ruled for termination of the implementation of its previous verdict, and the financial enterprise still has failed in its efforts to make the claim.

7. When the debtor fails to make repayment of the debt due for one of the reasons cited in paragraphs 1-6, the financial enterprise has collected the property of the debtor as compensation for the debt in accordance with the law and the compensation value has been entered into account as recognized fair at market price by proper assessment authorities, the property value is still short of the principal and interest of the debt, and the financial enterprise has failed in its efforts to recover the balance of its claim;

8. In the event of an advancement for the establishment of a letter of credit, bill acceptance or producing a letter of security, the applicant or guarantor fails to repay for the advancement on account of the reasons cited in paragraphs 1-7 above, the financial enterprise involved there fails in its efforts to recover the advancement money;

9. In the case of an investment abroad made by a financial enterprise with the right of making investment in accordance with the law and the financial enterprise fails in its efforts to recover its equities from the liquidation and making claims of the invested enterprise because the said invested enterprise is declared bankrupt, closed down or disbanded and terminated the status of a body corporate in accordance with the law;

10. In case a bankcard is forged, abused by a non-owner, or claimed falsely and the net loss arising therefrom that shall be borne by the bank.

11. In case a supportive loan to a college student cannot be retrieved by the financial enterprise after efforts have been made to recover the debt within the specified effective term of the retrieval by the bank and after disposal of the mortgage for the loan and after failing in making claims from the guarantor;

12. In case the financial enterprise fails to recover other accounts receivable (other than the principal and the interests involved therein) after three years of expiration of the term (excluding inter-enterprise borrowings between associated enterprises).

13. Other right to credits to be written off case by case with the approval of the State Council.

Article 3 Reductions of pre-income tax for rights of credit or equities cited below shall not be made by enterprise:

1. The right of credit of a financial enterprise not repaid in time when the debtor or guarantor has the financial power to make the repayment regardless of any reasons;

2. A right of credit of a financial enterprise is evaded or suspended in whatever form or under whatever pretext in violation of the law.

3. A right of credit of a financial enterprise is evaded or suspended on account of intervention by an administrative authority.

4. Debts a financial enterprise has not tried to recover from the debtor or guarantor.

5. Debts to a financial enterprise arising from non-business activities.

6. Other claims or equities of a financial enterprise that should not be written off.

Article 4 A financial enterprise may draw a reserve for bad accounts against the risks and losses to be borne by the financial enterprise with regard to the assets cited as follows: claims and equities such as loans (including loans with mortgage, collaterals and guarantee), overdraw on bankcards, property for compensation of liabilities, payments at discount, advancement on bank bills, advancement on securities, bills of exchange on imports and exports, equity investment and bond investment, inter-bank lending and borrowing, interests receivable (excluding interests receivable of loans), dividends receivable, premiums receivable, debts receivable involved in reinsurance, rents receivable.

Reserves may be drawn for bad accounts with regard to assets such as foreign loans reissued by a financial enterprise which is responsible for the repayment thereof, including loans from international financial institutions, foreign buyers credit, foreign government loans, loans without strings from the Japan International Cooperation Bank and foreign government mixed loans.

Reserves shall not be drawn for bad accounts with regard to assets such as trust loans and agent loans for which a financial enterprise shall not be responsible for the risks and the repayment thereof.

Article 5 Reserve may be drawn for tax deduction by financial enterprises in accordance with the formula below:
　　
Reserve allowed to be drawn for tax deduction = the asset balance allowed to be drawn for a reserve by year-end X 1% -- balance of the reserve of the previous year-end for deduction for bad account

Article 6 A financial enterprise shall report to the relevant tax authorities for examination and approval the bad account losses and then make due tax deduction to offset the shortage after first deducting the reserve already drawn for tax deductions for bad accounts.

Article 7 A financial enterprise shall pay income tax on the bad accounts collected but tax deduction already made; as for a bad account collected but reserve for tax deduction thereof has not been made, the part exceeding the principal shall be included in the taxable amount of the current term.

Article 8 A financial enterprise which files consolidated tax returns and needs to make a package reserve for tax deduction for bad accounts shall report its case to the relevant tax authorities of the local province (or autonomous region, or municipality directly under the jurisdiction of the State Council or cities of independent budgetary arrangement approved by the state) for examination and recognition and make overall deduction by year-end; if it needs to divide up the quotas for bad account reserve among its subsidiaries, the headquarters thereof in reporting its case shall submit the information of the divided quotas and after examination and recognition by the tax authorities of the relevant province (or autonomous region, or municipality directly under the jurisdiction of the State Council or cities of independent budgetary arrangement approved by the state), inform the subsidiaries thereof level by level for execution.

Article 9 A financial enterprise with bad account losses allowable for tax deduction shall apply to the local tax authorities within 45 days after the year-end for such deduction. In the event where it is impossible to make properly application in time for special reasons, it may request the relevant tax authorities for permission to extend the time for making application. A financial enterprise shall submit the following relevant documents and information in applying for tax deduction:

1. An application for tax deduction for bad account. The content of the application shall cover: the basic information of the debtor, guarantor and the invested enterprise, the situation of the issuing of the loan and its use and the situation of investment, the main reason for the occurrence of the bad accounts and the measures taken to make up for the losses and the result, the liquidation of the assets of the debtor, the invested enterprise and guarantor as well as the clearance and distribution thereof, the compensation and losses of the creditor and investor, the amount of the tax deduction, etc.

2. Loan and investment contracts, documents of loan issuance and investment and relevant materials.

3. Certifications provided by governments, law courts, public security departments, administration for industry and commerce, authorities in charge of enterprises, insurance companies and other relevant departments and organizations.

4. And other information demanded by the tax authorities.

The tax authorities may refuse to process an application if the applying financial enterprise fails to provide the necessary information.

Article 10 Upon receipt of an application of a financial enterprise for tax deductions for bad accounts, the tax authorities should make strict examination and if necessary, make on-the-spot investigations.

Article 11 As for a financial enterprise which exercise consolidated tax deduction for a reserve for all of its bad account losses, the headquarters thereof shall apply to the tax authorities of its subsidiaries of the relevant province (or autonomous region, or municipality directly under the jurisdiction of the State Council or cities of independent budgetary arrangement approved by the state) for tax deductions thereof and make such deductions upon examination and recognition by the local authorities if the headquarters thereof makes a consolidated tax deduction for the headquarters and its subsidiaries. If such deductions of the subsidiaries are to be made by the subsidiaries themselves, the subsidiaries shall apply to the tax authorities of (or above the level of) the local cities (with municipal districts) or prefecture for examination and recognition before such deduction is made. The subsidiaries of a financial enterprise should report the amount of the bad account losses for tax deduction to the headquarters level by level up within 6 months of the end of the accounting year and the headquarters shall organize the reports and submit them to the relevant province (or autonomous region, or municipality directly under the jurisdiction of the State Council or cities of independent budgetary arrangement approved by the state) for the record.

Article 12 The tax authorities at all levels should improve its work of examining the tax deductions for bad account losses and upon discovery of falsehood or deception on the part of the financial enterprises in cheating the authorities for tax deductions, the tax authorities shall exercise the power to rule out such deductions and make proper readjustments for additional income taxes and mete out punishments in accordance with the "Law of the People's Republic of China for the Administration of Taxation".

Article 13 This Procedure is applicable to all financial enterprises doing banking business (with the exception of companies of financial asset management) within the territory of the People's Republic of China, including all sorts of policy banks, commercial banks, insurance companies, security companies, trust and investment companies, financial houses, and financial leasing companies.

Urban commercial banks and urban and rural credit cooperatives shall implement this Procedure in making tax deductions for bad account losses, but the proceedings, field of power and specific requirements for the examination and recognition of such applications shall be formulated separately by the State Administration of Taxation.

Article 14 This Procedure shall enter into effect as of November 1, 2002.

This Procedure shall be also applicable to the tax deductions or the drawing of reserve for losses of bad accounts that occurred after January 1, 2001. Should any and all of other provisions and procedures contradict or be at variance with this Procedure, this Procedure shall prevail.

Article 15 The tax authorities of the provinces, autonomous regions, or municipalities directly under the State Council or cities of independent budgetary arrangement as approved by the state should formulate concrete provisions for the implementation of this Procedure and report them to the State Administration of Taxation for the record.